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Pure Play riding high as Intel, TSMC, GF, STMicro make love

Intel outsources more Atom manufacturing to TSMC and allows custom …

It's a conflict as old as RISC vs. CISC, and one still not settled: fab or fabless? It's been more than a decade since Cypress's T.J. Rodgers first said, "real men have fabs," a sentiment later echoed by luminaries of AMD and Intel, and more than two decades since Intel used its manufacturing dominance to attain market dominance over its microprocessor competitors. In that time, though, fabs have become increasingly expensive and risky to operate, and today entire sectors of computer components (graphics, sound, mobile devices) are dominated by fabless players. Clearly, the two modes of operation coexist well. Yet, two pieces of news today, in the shadow of larger pure play victories over the last year, seem to illustrate that, for even the most entrenched fab players, pure play foundries carry some advantages.

Intel: Pure Play allows risk-hedging, SoC Expertise, customization

In March, Intel announced it would outsource manufacturing of some Atom processors to TSMC, the world's leading foundry. The move could not have been caused by lack of fab capacity, or by the superiority of TSMC's fabs. Intel has the most advanced fabs in the world, is ahead of every other player in process transitions, and at the moment probably has plenty of capacity. The transition was probably about margins, and definitely about customization. Intel with low-margin products like Atom, the risk of a capacity excess due to swings in demand increases, and this risk is compounded by the massive costs of new fab investments. Moreover, TSMC, used to the hustle-bustle of custom orders for custom players and with lots of SoC experience, could customize silicon more for different players more easily than Intel. Santa Clara is hesitant to produce custom models for even the largest customers; Apple's finagling of special-model Core 2 Duo chips for the iMac was quite a coup, and even now these are open to everyone.

Now, more details have emerged, as the Taiwan Economic Newsreports that TSMC will manufacture not only Moorestown's southbridge, but the Atom-based SoC, as well, during this quarter. With both components of the platform on TSMC's process, and subject to customization, Intel's device-manufacturing partners, which so far include LG and Nokia, will be able to order Langwell-derived southbridges customized for the needs of their devices, on TSMC's 65nm process. Presumably, TSMC's SoC expertise has been useful in enabling this.

It's also possible that Intel is trying to allay concerns about single-sourcing from handheld vendors, who can point out the massive number of vendors hawking chips in the competitor ARM family. Putting TSMC in charge of some Atom manufacturing is one way to avoid some of those problems on a contract basis, without the renegacy risk of a licensing agreement similar to the one that gave AMD an x86 franchise.AMD: Pure Play allows risk-sharing, and an end to the CapEx treadmill

The other piece of news is related to AMD's recent breakup, in which the beleaguered semi firm, out of money and out of small divisions to sell off, split in two firms, a fabless microprocessor and GPU firm called AMD and a pure play foundry called GlobalFoundries, whose primary customer would be AMD but which would seek other customers in competition with TSMC, UMC, and the other foundries. AMD's fabs are well-regarded, competitive with TSMC on process and inferior only to Intel's facilities. The AMD branch is helmed by Dirk Meyer, while departing CEO Hector Ruiz would circle the walls of GlobalFoundries looking for more fab customers. Now, it has been announced, one has signed on.

The new customer, the fab-holding ST Microelectronics, is the fifth largest semiconductor firm in the world, offering a diverse portfolio of memory, signal processing chips, RFID controllers, and microcontrollers from simple 8-bit embedded ICs to powerful mobile ARM chips. STMicro is known to operate at least six fabs in Italy, France, and Singapore, mostly on the older, less efficient 200mm wafer size, but manufacturing on processes as modern as 65nm. The GF deal will give STMicro access to GF's 40nm low power process, more than a node's worth of improvement, at the Dresden Fab 1 complex and at the upcoming Fab 2 complex in Malta, New York.

It's known that GF will begin manufacturing its first products for STMicro some time next year, but unknown what those products will be. The two firms had already begun collaborating on the development of GlobalFoundries' 28nm process, to launch in late 2010 or early 2011. Meanwhile, the firm is seemingly neglecting the continuing development of its own fabs, building no fabs in the last six years after building six fabs in the ten years prior. These facts, together, give some credence to the notion that STMicro may abandon its own fabs entirely, phasing out its manufacturing activities to become a major partner in GlobalFoundries' fab operations and outsource all its manufacturing to GlobalFoundries.

In the era of GlobalFoundries and Atom outsourcing, pure play fabs are riding high, while "Real Men" become rarer and rarer. It's hard to know how far this trend will continue, or how fast, but recent evidence makes it clear that prognostications about a mass return of the fabbing design house miss the mark.

Originally posted by Zinger1:Outsource things that are not your core competency, business 101. Makes sense, especially considering the capital outlay. Specialization makes sense in this line of business, imho.

STmicro has a very good competency on process development (I should know, I'm working for one of their supplier, doing support on site ). The problem is one of CapEx and specialization. When a new scanner costs several dozen millions of dollars (around 45M USD right now), you can only buy several ones if you are sure you will get enough volume to keep it running 24/7. ST has a lot of different products, some of them need very advanced processes (like 45/32/28 nm), but most of them are fine on older processes (250nm to 90nm). I don't think they have sufficient volume below 65nm to warrant huge investments in the tools.

This is different from Intel (who goes to a better process ASAP to gain a competitive edge), Samsung (memory density will always benefit from a smaller node) or TSMC (they can mix products from various customers on the same production line, keeping the utilization rate up), and maybe a couple more foundries (Chartered among them).

The Fab business has seen a tremendous increase in CapEx over the last nodes. The way I see it (looking at all the PR about foundry agreements), what usually happens now is that IDMs (apart from Intel, Samsung and IBM) are now switching to an in-between model: they buy one scanner (+ litho track, etch, etc.) to develop a process compatible with a foundry, and then do the actual production at the foundry. This gives them a good understanding of the process, without occurring overly high CapEx costs and needing to build new fabs for each new process.